Turkey’s central bank keeps key rate at 19%, with USD / TRY widely rejecting move



  • Central Bank of Turkey leaves policy rate unchanged at 19%, in line with market expectations
  • Monetary policy statement retains a slightly hawkish bias, but investors appear unconvinced
  • USD / TRY Declines Slightly Following CBRT Rate Decision

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The Central Bank of the Republic of Turkey (CBRT) today announced its July monetary policy decision. In accordance with expectations, the institution directed by Sahap Kavcıoglu opted keep the one-week repo rate unchanged at 19.00%, contravening the wishes of Turkish President Recep Tayyip Erdogan, who has repeatedly called for lower borrowing costs to stimulate the economy.

the move leaving rates stable for five consecutive months and avoiding lowering them responds to relentless inflation, stuck in double digits for more than three years. For reference, the CPI index for June cadenced at 17.5% year-on-year, its highest level since May 2019, due to the hike in the fuel tax, higher commodity prices and the weak TRY.

The CBRT statement retained slightly hawkish language and indicated that restrictive monetary policy will remain resolutely in place until a significant drop in the expected inflation path is reached, as is the volatility of the Inflation during the summer months linked to the reopening of the economy and high levels of inflation expectations continue to pose risks for price formation. This message appeared to trigger a marginal reaction to the decline in the USD / TRY exchange rate, which fell from 8.6320 to 8.6136 after the announcement crossed wires.

Despite the current rhetoric, the central bank may start reducing the cost of money in the coming months when the CPI cools supporting the recovery and easing financial conditions, going against other central banks in emerging markets which have start contraction rate to combat rising inflationary pressures.

As a reminder, President Erdogan put pressure on the institution, which many investors say lost its independence, to a rate cut at the July or August meeting. Any CBRT rate cuts in the second half of the year, as well as the The Fed prepares to normalize its policy, will likely weigh on the Turkish lira and push the USD / TRY to new all-time highs, exacerbating the upward trend in inflation rather than slowing it down.


Chart prepared by Diego Colman using TradingView


— Written by Diego Colman, DailyFX Market Strategist

Follow me on Twitter: @DColmanFX

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